Sponsored by World Gold Council
[00:00:00] Maria: Welcome to WealthManagement.com's video spotlight interview series. I'm Maria Rosati, contributing editor for WealthManagement.com. Today we’re speaking to Joe Cavatoni, Head of Americas, World Gold Council. We’re going to be discussing their mid-year outlook for 2020 and the impact on the performance of gold. Before we begin, Joe, can you tell me a little about your background and your role at the World Gold Council?
[00:00:19] Joe: Sure, Maria. My role is focused on primarily working with investors, and wealth managers and all types of advocates for the gold market to ensure that they have everything they need to make an educated decision on how gold can play a role in their portfolio, and effectively making it a mainstream asset. We talk to clients. We talk to the influencers in the market like broker or dealers.
We talk to index providers. We talk to a number of different firms to make sure that data is available, insights are provided. Our content is really addressing the questions people have as they look at gold and they think about it in the context of what are they trying to achieve with their portfolio, and how it can help them get to those goals?
[00:01:05] Maria: Let’s get to question number one. We've seen a lot of volatility in the markets recently. How has that impacted the price of gold?
[00:01:12] Joe: Market volatility, in particular in 2020, has had a significant impact on a number of different assets. Gold has done exactly as we've talked with people about, which is it's provided its return profile and offered people access to a liquid instrument in a time when they need it most. Ultimately, when you're looking for a liquid instrument to actually achieve your outcome in terms of maybe liquidating and having cash come back into your portfolio, what you're going to find with liquidity in gold is that it allows you to preserve that earning that you have, while not necessarily having an impact on the return that you've achieved.
It's basically liquid and liquid enough to allow you to have that type of performance in the portfolio. In short, it's basically giving you a return profile and the liquidity to achieve that return.
[00:02:06] Maria: Having discussed market volatility, is gold still an ideal portfolio hedge?
[00:02:12] Joe: 100%. The uniqueness of gold is that it has a dual nature. When we talk about it being a hedge, it definitely performs well in market environments like we're experiencing today. When people know that there's a need to flock to a real asset that preserves its value and has a return profile and can be liquid in a time of need, gold's definitely doing that. It has the right correlations to equity, which is negative when an equity market is selling off as an example. Don't forget, it's not only good during the times when we know it's a hedge for market volatility and markets declining, it performs well as that unique asset in times of buoyant and positive returning markets.
When equities are actually performing positively and favorably as an example, gold, again, will be positively correlated to the performance of equities. Economic expansion leads to wealth creation, leads to consumer behavior, increasing the uptake of gold. Market risk and uncertainty, leads to risk protection and balancing out portfolio to preserve holdings and that's where gold works that well in that portfolio as well.
[00:03:30] Maria: What do you think have been the key drivers of gold’s performance?
[00:03:40] Joe: Right now, it's been driven mainly by that concern, and the questions around market risk and uncertainty. That's been our outlook for, I'm going to say, about 18 months. What our midyear outlook is going to talk to people about and give them really more detail is on getting deeper into how to handle your portfolio and what to consider in these times of market risk and uncertainty.
We know we've dealt with geopolitical risks, big issues in the markets, for example, Brexit, China trade tensions, et cetera, and a very frothy equity market and overvalued potentially equity market. COVID-19 has just brought all of this to a much more amplified situation. It's a terrible set of circumstances that have led to a much more challenging environment for people to understand how to manage their portfolio.
Our midyear outlook is going to talk to you about whether or not bonds are really going to achieve what you think they are going to achieve for you. Our expectation is that with negative real rates, predominantly on the shorter end of the curve, is that they're going to provide less of that return profile, that stable return profile that people are expecting, and that's where gold can be a complement to your core holding of bonds.
Then again, with equities, this is a very volatile time in all assets, in particular equity markets. You need to have that certainty around what gold will perform for you.
[00:05:08] Maria: We've seen a lot of the Central Banks lower interest rates. How is that impacting the price of gold?
[00:05:17] Joe: Well, Central Banks lowering rates is definitely putting a significant amount of pressure on a fixed income market, for example, that I just mentioned. There's a lot of challenges around trying to get to your target 7% to 9% return when you know the real returns and portfolios holding bonds are going to be struggling to maintain that. When people are thinking about what are you adding, what compliment are you adding to the overall portfolio, this is where gold provides a favorable return profile, roughly 16% year to date up on a market that's very hard to predict.
It does provide that return. It has a liquid instrument and it has the right correlation behaviors that you'd want to have in your portfolio. What Central Banks are doing to the rate environment, the monetary policy, the implementation of fiscal influence is actually leading to a much more complex environment for you to ultimately try and figure out how to load your portfolio with the right types of tools.
Now, separately, Central Banks are also one of the driving forces why gold is actually performing the way it is. Investments and central bank behavior where monetary policy and reserves are increasing overall holdings to gold, these are factors that are continuing to put gold front and center as a balance to the portfolio and driving the growth of the gold market, the growth of demand and actually the overall trajectory of the price-performance. Investment is driving it right now. Consumer demand, definitely lagging because of a lot of different challenges, India and China, in particular, but you're seeing the growth in investment.
[00:06:54] Maria: We’ve seen record inflows into gold backed ETFs. Do you expect that to continue?
[00:07:04] Joe: I'm seeing a number of different records as we speak. Number one, record holdings all-time in terms of ETF holdings roughly 205 billion worldwide. Secondly, record flows for the year as you've pointed out. Third, what people are probably less familiar with but really should make sure they understand, more opportunity to own gold through exchange-traded funds than ever before. Over 83 instruments worldwide that are being accessed by investors on a worldwide basis.
Our expectation continues to be that gold as an investment is going to be very, very much front and center and a key component of what people are looking at between now and the end of the year and beyond. We know that people are very comfortable with the solid performance of exchange-traded funds. Our expectation is as it continues to be a driver in the investment community, gold, you'll see that ETFs continue to be an instrument used by investors worldwide.
Most of the growth in 2020 has been in the North American markets but it's really important for me to highlight to people that ETFs demonstrate really how global gold really is as an instrument. You see growth in Europe. You see an increasing level of growth, even in China and India, very fledgling ETF markets for the gold market, but they're starting to show and demonstrate growth. Again, like I mentioned, significant growth in the North American markets.
[00:08:29] Maria: And finally, what is your outlook for the remainder of the year?
[00:08:38] Joe: We have three key points that we want to highlight to people, and they're consistent with what we've been having in terms of our outlook for overall how you should be thinking about gold in the investment landscape. Number one, gold provides the right type of characteristics for a long-term allocation to your portfolio, the return profile, the liquidity profile, the correlation and diversification benefits that come with it, and overall portfolio impact.
Those four factors need to be well understood by your clients, our clients, the investor community because it makes everyone understand that gold plays a role in your portfolio in the long term. The second two items that I'd highlight is we're in a world of absolute uncertainty in terms of market performance. Are we going to see a U-shaped recovery, a V-shaped recovery, a W recovery? I don't know the answer. What I do know and what I can tell people is as you're looking at asset performance under all of those circumstances, gold does perform, as we've told you, and you should consider it as a key component.
Then the last thing we'd say is geopolitical risks, they're still there. Once we get through, and hopefully we get through the situation with COVID-19, you're going to find that the outlook continues to have many of the characteristics that were there before 2020. Geopolitical risks, tensions with trade, and overall, very, very highly valued equity markets and a lot of question around whether they can sustain those levels or not. Think about gold. Think about it as an allocation in your portfolio. Work with the World Gold Council and we'll help you determine what works best to achieve your goals.
[00:10:20] Maria: Thank you Joe for being with us today.
[00:10:24] Joe: It's great to be here, Maria. Thank you.
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